Business Model of Costco

Author- | Posted- | Updated: September 10, 2020 |

Costco (NASDAQ: COST) is among the leading retail brands based in the United States. While Costco is mainly a chain of warehouse clubs, other retailers have adopted different business models than the one that Costco follows. It is among the leading competitors of Walmart, the largest retail brand in the US. For faster growth, the company has been investing in digital technology, and its investment in digital commerce seems to have started paying off.  Costco also sells premium products under its private label brand Kirkland Signature which is also a strong driver of sales and popularity for Costco.

Similarly, there are many other retailers in the US retail industry that owns many private label brands that are unique to the company. Costco is a famous retail brand with a strong presence across the United States, which is its leading market. The retailer has also built an impressive presence outside the United States in many more markets as well. There are several more outstanding facts to know about Costco’s business and operating model. We will analyze the business model of the Costco wholesale group in this post and what factors have helped it acquire as much financial success and popularity. The United States retail industry has grown highly competitive, and apart from the US-based brands, some international brands are also trying to establish their presence in the market. In such an aggressively competitive market environment, retail companies need to invest in strengthening their competitive advantage to retain their growth momentum. 

Business Model of Costco:

Costco is a membership-only warehouse, unlike either Walmart or Target. It adopted a very different business model than other retailers. The focus was always on providing the customers seamless shopping experience and developing an organizational culture that fostered employee motivation and placed a heavy focus on customer service. Apart from other things, Costco is known for its unique organizational culture. In this way, the company has built an outstanding image and achieved a place among the leading and most popular employers of the United States. However, Costco has also been successful at expanding its presence to various other geographical markets lying outside the United States.

Costco Wholesale Corporation and its subsidiaries started operations during 1983 in Seattle, Washington. The company operates in several international markets apart from the United States and Puerto Rico, including Canada, UK, Mexico, Japan, Korea, Australia, Spain, France, Iceland, China. In Taiwan, the company operates its business through a majority-owned subsidiary.  As of December 2019, Costco operated 785 warehouses overall. Costco added 25 new warehouses during the year, including five relocations as well as its first warehouse in the Chinese market. The company offers an omnichannel retail experience utilizing both online and offline channels as well as delivery channels. In the US, the members that live within 20 minutes drive from the Costco warehouses can also avail of same-day delivery services. The US-based retailer has also continued to grow its investment and focus on e-commerce to support its core physical retail activities. 

How Costco makes money?

Costco generates a substantial part of its revenue from retail sales. However, apart from that, it generates a small portion of its net revenue from memberships. During 2019, the company generated $149.4 billion from retail sales and $3.4 billion from memberships. (Revenue from membership fees increased 7% in 2019 compared to the last fiscal.) Compared to that Costco’s revenue from retail sales was $138.4 billion in 2018 and $3.14 billion from memberships. 

Business Segments of Costco:

Costco operates its business mainly on a geographical basis. It has divided its business into three main geographical segments that include the United States, Canada, and other international markets. 

United States: 

It is the largest market of Costco based on revenue and the number of warehouses. As of December 2019, 546 of Costco warehouses were operational in the United States and Puerto Rico while Canada had 100. The remaining of the total 785 warehouses were operational in the other international markets. Costco also runs e-commerce platforms in the United States. As of fiscal 2019, the company generated a total of $111.8 billion in net sales from the US operations compared to $102.3 billion in 2018. Its operating income from the United States market was a total of $3.1 billion compared to $2.8 billion in 2018. 

Canada:

Canada is the second-largest geographical market of Costco based on the number of stores and net revenue. In December 2019, the number of Costco warehouses operational in Canada was 100. The company generated $21.4 billion in net revenue from the Canadian market. Apart from that, the operating income of Costco from its Canada operations was $924 million compared to $939 million in 2018.

Other International Operations: 

The operations of Costco in the markets excluding the US and Canada are included in one segment called ‘Other international markets’. These markets include Mexico, U.K., Japan, Korea, Australia, Spain, Iceland, France, and China as well as Taiwan where Costco operates its business through a majority-owned subsidiary. The other international operations of Costco generated $19.6 billion in net revenue in 2019 compared to $18.6 billion in 2018. The operating income of Costco from other international operations remained nearly flat at around $750 million for the last two fiscals.

Costco Merchandising:

Like Walmart, Costco also relies on direct sourcing to keep prices low for its customers. In this way, it has eliminated the middlemen and been able to reduce the prices of merchandise for its customers. This has helped the company gain cost efficiency which is further bolstered through the use of efficient inventory management techniques. The company sources from manufacturers directly and sends the merchandise to cross-docking units which helps it reduce the costs related to warehousing and inventory management. Apart from quality merchandise, the company also maintains consistently lower prices to attract customers. The strategy of the retail brand is to provide its customers with high-quality merchandise at prices consistently lower than its competitors. Costco offers its customers merchandise in the following five main categories:

Food and Sundries:

This merchandise category includes dry foods, packaged foods, groceries, snack foods, candy, alcoholic and nonalcoholic beverages, and cleaning supplies. This is the largest segment of merchandise based on net revenue. During 2019, the company generated $59.7 billion in net sales from food and sundries compared to $56.1 billion in 2018. 

Hardlines:

This merchandise category includes major appliances, electronics, health and beauty aids, hardware, and garden and patio. This is the third-largest merchandise segment based on net sales. Hardlines generated $24.6 billion in net sales in 2019 compared to $22.6 billion in 2018. 

Fresh Foods:

This merchandise category includes meat, produce, deli, and bakery. Fresh foods generated $19.95 billion in net sales in 2019 for Costco compared to $18.9 billion in 2018.

Softlines:

This merchandise category includes apparel and small appliances. Softlines is the smallest category of merchandise based on net yearly sales. In 2019, this segment generated $16.6 billion in net sales compared to $15.4 billion in 2018.

Ancillary:

This merchandise segment includes the gasoline and pharmacy businesses of Costco.  As of 2019, the company operated 593 gas stations and gasoline sales accounted for 11% of the net sales of Costco. The ancillary businesses of Costco operate inside or next to its warehouses.  They offer expanded products or services to encourage customers to shop from Costco more frequently. The ancillary businesses of Costco include gas stations, pharmacies, optical dispensing centers, food courts, and hearing-aid centers.

The ancillary business of Costco is its second-largest merchandise segment based on the yearly net sales. In 2019, this segment generated $24.6 billion in net sales in 2019 compared to $22.6 billion in 2018. 

Merchandise2018 ($ Billions)2019 ($ Billions)
Food and Sundries$56.1$59.7
Hardlines$22.6$24.6
Fresh Foods$18.9$19.95
Softlines$15.4$16.6
Ancillary$25.5$28.6
Total$138.4$149.4
Data sourced from Costco form 10K.

Costco E-commerce operations:

Apart from being the disruptor, digital technology is also generating new opportunities for retail brands in the United States. The challenge from Amazon is growing and therefore leading retailers in the United States including Walmart, Costco and Target are investing more in technology to grow their sales and competitive position in e-commerce. 

In 2019, as Costco added more merchandise to its e-commerce operations, its website experienced growth in traffic. The company has also continued to grow its investment in technology to improve the Costco app. During the last fiscal year, the company also improved its delivery times. The company also continues to add more functionalities to its app and adding new features for higher customer convenience. During 2019, the company added new features to its app, including Digital Membership Card in the U.S. and Canada, Costco Pharmacy order placement and pick-up notifications, and an option to navigate directly to member savings events. The app has been installed more than 5 million times from Google Play Store. The company is also launching e-commerce operations in Japan and Australia in 2020. At the end of 2019, the company was operating e-commerce websites in the US, Canada, Mexico, the U.K., Korea, and Taiwan.  E-commerce sales accounted for 4% of the company’s net sales in 2019.

Costco’s Competitive advantage:

Costco is a leading retail brand based in the United States. The company has enjoyed impressive growth in net sales and revenue over the past several years.  The business model of Costco has several strong sources of competitive advantage. In terms of retail sales, despite a limited presence compared to the leading retailer Walmart, it enjoys a strong presence in the US and is one of Walmart’s most powerful competitors. Just like Walmart’s Sam’s Club, Costco also owns a private label brand Kirkland signature which is one of the primary drivers of demand and sales as well as popularity for Costco. However, the company is now eyeing a bigger pie of the US e-commerce market and therefore continues to grow its investment in digital technology. The leading pillars upon which the success of Costco rests and that are the primary drivers of competitive advantage are discussed below:

Lower pricing:

One of the leading sources of competitive advantage for Costco is its large merchandise range that the company offers at consistently lower prices compared to most rivals in the US and international markets. One of the core values of Costco is to provide great quality goods and services at lower prices and the company has remained committed to its core value in its history. While the product range offered by Costco is limited compared to Walmart, its gross margin is also much lower than Walmart and Target. The company has designed its business model in a manner to generate most of its profits from membership fees. By keeping prices very low and using efficient inventory management techniques, the brand has managed to attract a large customer base. Most of its customers like to make repeat purchases from the warehouse retail giant which is the primary driver of sales and revenue for the company. A limited selection of nationally branded and private label products in a wide range of categories has continued to drive higher sales volume and rapid inventory turnover for Costco.

Organizational culture and HRM:

Costco is also known for its organizational culture and excellent HR management strategy. Costco has earned the reputation of a leader in terms of HR management and corporate culture, which is also a source of competitive advantage for it. Costco acknowledges that its employees are an asset for the organization and the leading drivers of competitive advantage for the brand in the physical retail industry.  Apart from providing them excellent wages and health benefits, the company also promotes inclusion and diversity. It also focuses on employee training, including leadership training, and creates growth opportunities for the workers like promoting from within. The number of employees working for Costco increased to 254,000 in 2019 compared to 245,000 in 2018. Its organizational culture and focus on human resource management have also helped the company gain popularity and build a robust social image.

Private label brand:

Private label brands are also major drivers of demand and growth for both Costco and Target.  Kirkland Signature is a private label brand owned by Costco. The company has remained committed to the growth of its private-label brand Kirkland Signature and continues to develop new items and build stronger relationships with premium brands. During 2019, the company added products from Apple, Columbia Sportswear, Sony, and Weber brands to its Kirkland Signature range. The company offers a very large collection of products from Kirkland Signature. Product quality and lower pricing is key to maintaining customer loyalty for Kirkland Signature.

Product Quality: 

Another important area where Costco has maintained a consistent focus is product quality and which has continued to drive demand and customer loyalty for the business is product quality. The company sources directly from the manufacturers and also places heavy focus upon quality to attract and retain customers. A large range of good quality products is one of the main attractions of Costco and its private label brand Kirkland Signature.

Strong customer loyalty:

As a physical retail brand, the company enjoys a very high level of customer loyalty which is clearly reflected in its membership renewal rates. Its customer retention rate over the past several years has remained impressive. In 2019, the membership renewal rate of Costco was 91% in the United States and Canada. Overall worldwide, the company had a membership renewal rate of 88%. The company also continues to attract new customers worldwide through strong branding. In Shanghai (China, when the company opened its first store in 2019, it had 139,000 membership signups by the day of opening its first warehouses. The company remains committed to customer experience in order to maintain strong customer loyalty.

Costco spends nearly nothing on advertising and promotions unlike the other retailers including Walmart, Target, and even Amazon. Instead, it relies on its strong reputation, customer service, and product quality to drive demand and sales. This is a fundamental strength of Costco’s business model and a core pillar of its business strategy.  With competition in the retail industry growing all the more intense, most retail brands have grown their spending on advertising which is a leading driver of sales for most of them including Target. However, Costco still relies on strong branding to drive sales, revenue, and customer loyalty.

Supply chain and inventory management:

Supply chain and inventory management practices also decide the competitive edge of the brand in the physical retail industry. Costco sources products directly from the manufacturers in order to keep prices of the merchandise low. Like Walmart, it has also adopted innovative supply chain management practices that drive higher efficiency and help maintain consistently lower prices. It also utilizes cross-docking to keep inventory low and reduce the costs related to warehousing and inventory management.

Financial Performance of Costco over the last two years

Costco’s financial performance has grown consistently over the past several years. The net revenue of the company grew by around 8% in 2019 compared to the previous fiscal year. Net sales of the company during 2018 was $138.4 billion. Apart from that Costco generated $3.1 billion from memberships. The net revenue of the company in 2018 was $141.6 billion. It climbed to $152.7 billion in 2019 of which $149.4 billion came from retail sales and $3.4 billion from membership fees. Net sales of the company experienced an 8% growth from 2018 to 2019. 

Net income of the company experienced a growth of around half a billion having climbed from $3.1 billion in 2018 to $3.66 billion in 2019 (YoY growth of around 17%).  Of all the geographical markets of Costco, its leading market, the United States experienced the highest growth in net sales, where Costco sales grew by 9%. Canada experienced a growth of 3% and the international segment of Costco experienced a growth of around 5%.

Five Operational Performance Objectives

To run an organization, a well-defined set of operations performance objectives is essential.  There are five basic performance objectives applicable to all types of business operations. These five basic operations objectives include cost, dependability, flexibility, quality, and speed. There are both internal and external implications of these five performance objectives.  Moreover, the internal effects of these performance objectives have a definite impact on cost.

Quality:

This is the first leading operational performance objective. It refers to consistent performance according to your customer’s expectations. Quality also affects customer satisfaction to a significant extent. However, the meaning of quality can vary across industries and businesses. Suppose there is an automobile business and there is another technology business. The same quality standards would not apply to each of the two businesses. Quality can acquire different meanings in different settings or industry environments. While in some industries, the level of staff friendliness is a leading parameter on which to measure quality, product efficiency is the main indicator of quality for another. However, no matter whatever industry a business belongs to, customers appreciate quality cannot be denied. Quality can, therefore, bear a direct and major influence on customer satisfaction as well as organizational performance. Nevertheless, quality is also related to a company’s image and apart from making certain things easier for the business like customer acquisition, it can also increase an organization’s profitability. When looked at in the context of the retail industry, quality denotes many things including product and service quality, staff friendliness, store environment, as well as more things like the image of the business as well as organizational culture.

As in the case of Costco’s business (including both physical and online retail), quality means product quality as well as customer service and also the overall customer experience. Costco is an international business and apart from its customers in the United States, it is also present in many more markets where it offers its customers omni-channel shopping experience. Product quality remains one of the major drivers of sales for Costco. Both product quality and prices can be seen as two key aspects of quality for the retailer. So, overall there are many elements that together define quality for a large physical retailer like Costco. However, when it comes to retail including both physical and online retail, price is an important determining factor for most retail brands. It affects their image and customer experience. In the case of Costco, like its leading rival Costco, its consistently lower prices are a leading source of popularity as well as customer loyalty for the brand and also one of the main reasons that the company has grown into one of the largest and most popular physical retailers in the United States.

Like Walmart, Costco also follows a competitive pricing strategy which is a key aspect of its overall customer experience. The company sells a vast assortment of products and it sources its products from a large group of suppliers. Costco also uses its leading position, financial strength as well as clout in the retail industry to source products at lower prices. In this way, the company is able to pass the benefit to the customers in many countries including the United States in the form of lower prices. While there is significant competition in the retail industry due to the presence of several strong physical and online retailers, Costco has very well managed to retain its leadership position and growth momentum by placing a consistent focus on product quality as well as customer service.

One leading aspect of quality that Costco is well known for is its customer service. This is an important area of focus for Costco and the company has made it a part of its core organizational culture. Apart from selling a vast range of good quality products, Costco has also built a strong reputation in terms of customer service and organizational culture. The company is known throughout the United States for its unique organizational culture.

Speed:

As the industry has evolved with the growth of digital technology, speed has become more and more integral to business performance and growth. In fact, you cannot imagine operational performance without speed. Now in nearly every industry speed matters just as much as quality or prices. Customers want that products are delivered to their doorsteps faster. In this era, where a large range of services are delivered and consumed online including a large range of technology and entertainment services, speed matters a lot and sometimes it can be a leading differentiating factor for a company. A company that brings ideas to the table and products to the shelves faster than its competitors usually finds itself ahead of the others in the market.  In some industries where services have to be consumed instantly, speed matters more than ever. Apart from that, in some industries, businesses need to keep the shelf filled with the latest items in order to engage their customers and it is also a reason that speed is so important. For the retail industry, speed has also acquired distinct importance since it also has a direct impact on the competitive position of a brand. However, speed is important not just in terms of delivery but in other operational areas too.

Speed and efficiency have remained important for Costco in terms of operations and have helped the brand maintain its leadership position in the US retail industry and find faster growth. Apart from speed and efficiency in its physical operations, the company is also investing in e-commerce to deliver an omnichannel shopping experience to its customers. Investing in e-commerce has become important for several reasons. First of all, the leading physical retail companies in the United States like Walmart, Costco, or Target are all facing stiff competition for the e-commerce leader Amazon. Apart from that with the growth of digital technology, now no retail brand can expect growth without investing in digital commerce. Even if Costco has not acquired as much growth in this area as its leading rival Walmart, the company continues to gain momentum and over the next few years could have strengthened its position in e-commerce a lot. However, the key thing related to e-commerce is speed, and optimization of its fulfillment networks has helped Costco serve its customers in the US with higher speed and efficiency. The other areas where the company has consistently focused on growing operational efficiency and speed are supply chain and inventory management.

Dependability:

Dependability or reliability is in itself considered a sign of quality in this era. Dependability, reliability, or trust are synonymous with brand equity which is an important strength for any industry-leading brand including Walmart. How dependable your business is or how much your customers trust your brand affects your brand equity. However, there are several factors that affect dependability in each industry. For example, while the quality of raw materials and the final product will have a direct impact on the dependability of a business, in the other it is the timeliness of delivery of services that will affect dependability. Keeping the promise you made to your customers also affects dependability. There is another factor that has kept growing in importance for businesses as well as customers in the twenty-first century and which also affects dependability is the overall level of customer experience. Brands that offer a superior customer experience overall are considered to be more dependable by the customers. Apple and Amazon are two great examples that have maintained very high-level customer loyalty because they deliver superior customer experience. However, with increasing competition in the physical retail industry, retailers like Walmart, Costco, and Target are also focusing more than ever on customer experience in order to retain their competitive position in the US retail industry.

Brands like  Costco are known for taking customers’ trust seriously. Apart from its lower prices and customer service, the company is known for offering a unique customer experience to its valuable members.  The company is also known for its unique organizational culture whose focus is customer service as well as employee empowerment. Only lower prices are not sufficient in this era to attract and retain customers. The level of competition in the retail industry is very high and in order to beat the competitive pressure, the companies also focus on other aspects of their operations. It is also essential to maintain strong customer relationships in order to maintain a very high level of customer loyalty. The company trains its employee to offer superior customer service. Another important thing about Costco is its unique organizational culture. Employee empowerment and employees’ satisfaction is a central focus of the company’s organizational culture. If Costco is a highly dependable or trusted brand then the reason is that the company has taken the trust of the employees as well as the customers seriously. Costco is a highly trusted and respected retail brand and it has successfully built a unique identity that differentiates it from the other retail brands.

Flexibility:

Flexibility means the ability to change what, how, and when operations do. There are four types of flexibility in general that are applicable to business operations. They include product/service flexibility, mix flexibility, volume flexibility, and delivery flexibility. Product/ service flexibility means the ability to introduce new or customized products or services. Mix flexibility means the ability to widen the product/services mix to cater to the customer needs better. Volume flexibility denotes the ability to change the output level to produce different quantities of products/services over time. Delivery flexibility on the other hand means the ability to change the timing of delivery. Overall, flexibility is an important aspect of operational performance and superior flexibility also denotes superior performance. Flexibility can also acquire different meanings in different industrial environments. For example, in a healthcare environment, the ability to introduce new types of treatment and to widen the range of available treatments or the ability to adjust more patients and reschedule appointments can all be a sign of flexibility. However, in the case of the automobile or retail industry, flexibility can mean different things.

As in the case of Costco, its flexibility is reflected in the large product/services mix it offers as well as its international expansion. Costco sells a vast range of products and the company has continued to expand its product range over years in order to cater to the needs of a larger customer segment domestically as well as internationally. Overall, Costco is a highly flexible company. Its flexibility is driven by several factors including its sales distribution network, its physical and technological infrastructure, a large pool of talented employees as well as its ability to understand customer needs and to deliver a seamless customer experience.

Cost:

Cost in terms of operations performance mainly means the operating expenses incurred by businesses. However, the proportion of various operating costs can vary from industry to industry. For example, staffing costs may represent the largest costs for a transportation company but the costs of raw material may be the largest group of operating costs for an automobile brand. In the case of most companies, if their operating expenses are low, they can also keep the prices low for their customers. Not all companies compete in the market on the basis of price. Some companies compete on product quality, other companies compete on the basis of customer service and others on the basis of marketing or all of these factors. However, even the companies that do not compete on the basis of prices, they too are interested in keeping their operational costs low. If a company reduces its operating expenses that will help it increase its profits because a penny saved equals a penny gained. The way in which operations need to be managed in order to keep operating expenses low requires focusing on areas where the company incurs the highest operating expenses.

The biggest category of expenses that Costco incurs each year is the merchandise costs. The company sources the merchandise it sells from various suppliers. In fiscal 2019, the merchandise costs of Costco grew to $132.9 billion compared to $123.2 billion in 2018. The selling, general and administrative expenses of the company which are the second-largest category of its expenses grew to $15 billion in 2019 compared to $13.9 billion in 2018.  While on the one hand, the growth in operating expenses of the company shows an increase in sales of the company, it also reflects the growing competition in the retail industry. However, in order to save on operating expenses, companies like Costco focus on maintaining strong supplier relationships.

Analysis of  Costco’s Operations based on the 4Vs model:

Operations and operational processes are like the fundamental building blocks of organizations that have a significant influence on the productivity of the organization and the quality of the organizational output as well. Focusing on operational efficiency has helped businesses find faster market growth as well as maximize output. Many times, if the efficiency of processes is low then it is mainly because the organization has adopted a poor operational design. Processes across business organizations and industries can differ significantly and that is why all processes must be managed differently. Some of the leading differences between various processes are due to the technologies and the level of know-how involved. Different processes require different production equipment as well as different skills and know-how. However, apart from these things, the difference also lies in the nature of the demand for the products and services these processes produce. There are four particular characteristics of demand that have a significant impact on process management and which are as follows:

  • The volume of the products and services produced
  • Variety of products and services produced
  • Variation in the demand for products and services.
  • Degree of visibility that customers have of the production of products and services

Volume of products and services:

Does the business being discussed produce a large amount of the same products and services or various items in small volumes? For example, a car company will produce thousands of pieces of the same model.  On the other hand, a fashion brand will produce limited pieces of various designs. If the volume of output is high, it indicates repeatability or high-level familiarity of the processes. Many times since a large business produces more and more of the same thing, it gains significant expertise in producing that product. It also helps the business gain a significant competitive advantage compared to the smaller ones.

In the case of Costco, while the company sells several private label brands too, it does not produce the products it sells. Instead, it sources from thousands of suppliers from all over the world and mainly in the US as well as some Asian countries. However, the assortment of products that the company sells is indeed large and despite that, the company competes on the basis of prices and product quality. The volume of products sold by the company is very large and it also sources form its suppliers in very large volumes. Sourcing merchandise in large volumes helps the company keep product prices low for its consumers. Production is indeed not a main aspect of operations for retailers like Costco that depend mainly on their suppliers for the products they sell. So, production efficiency is in fact immaterial in the case of retailers like Costco, or even e-commerce brands like Amazon. In the case of the private label brands that retailers like Costco, Walmart or Target sell, they generally outsource the production part to external suppliers that produce it to the company’s specifications. However, despite sourcing from a very large number of suppliers, the company tries to maintain its quality standards and lower prices as compared to rival retailers.

Variety of processes (products and services produced):

 Variety is related to the various types of activities that are being performed by the company and how well it manages the various processes. The level of operational complexity is very high when it comes to a mixed model manufacturer that is engaged in lots of changeovers between processes. It means apart from having to choose from a very wide range of inputs, the company has to handle the additional complexity of matching specific customer requirements in terms of products and services. Generally, the high variety processes are more costly as compared to the lower variety processes.

For example, Costco is one of the largest physical retailers in the United States. However, the company is not engaged in complex production processes. Its main operations include running retail stores, managing its sourcing or suppliers network as well as distribution and warehousing. However, the company has managed the efficiency of its processes in all these areas very well and apart from a large range of retail stores in various formats, the company also runs e-commerce websites and a fulfilment network to cater to the needs of the customers buying online from its website.

The company sells a wide assortment of products including products its private label brand Kirkland signature through both physical and online channels. However, in most areas from supply chain management to distribution and sales the operations of the company follow a general and fixed format. Its employees operate the warehouses and the company manages supply chain operations that ensures business efficiency as well as higher productivity. Since the company does not have to handle high variety processes, the level of operational complexity remains low for the brand. However, if the operating expenses of brands like Costco are high then it is mainly because the retail brands incur high merchandise costs.

 Variation in demand of products and services:

In fact, demand variation is among the most challenging aspects of business operations. It is easier for businesses to manage the processes when the level of demand is predictably constant. However, when demand can fluctuate significantly, then managing processes becomes somewhat complex. If demand is predictably constant, it is easier to gear resources to efficiently cater to the existing demand, Moreover, businesses can plan operational activities including marketing and sales or after-sales services in advance.

On the other hand, if the level of demand varies significantly or can be highly variable or even unpredictable, then resources will need to be adjusted over time. What is even worse is that if demand can soar unpredictably, extra resources need to be devoted to the process such that it provides a capacity cushion that can easily absorb the unexpected demand. Let’s take a simple example of seasonal variations in retail and e-commerce. Demand for a large range of products surges suddenly during the festive season including gifts, electronics, home decor products as well as fashion products. Another important factor that can cause a variation in demand for specific products and services is the level of competition in the market. If the overall level of competition in the market is very high, the companies have to care a lot to maintain the demand for their products and services and that may require a large annual investment in marketing as well as technology (in the areas of e-commerce and fulfillment). Apart from that in order to maintain the level of demand for their products and services, the companies like Costco also have to focus a lot on customer experience, innovation, as well as product quality since any decline in these areas, can lead to a corresponding decline in customer loyalty as well as demand.

Seasonal variations in demand for the products sold by Costco is nothing surprising. Demand for a various types of merchandise especially surges a lot during the holiday season and these products will fly off the shelves in really no time. However, Costco always remains ready for such variations. In recent years, it has also expanded its fulfilment capabilities and customers that live within a close range of its warehouses or within a short driving distance can enjoy same day delivery. Retail brands in the United States also employ part time employees in order to cater to the growth in demand that happens in the holiday season. Moreover, companies like Costco are generally aware of the products and services whose demand may suddenly grow during the holiday season. It manages its inventory according to the level of demand as well as other necessary factors like demand for specific products in specific geographic regions.

Visibility of processes:

This is also a rather complex aspect of business operations to grasp. It denotes that aspect of business operations that is easily visible to the customers. The businesses that work with consumers directly may have more visible processes. For example, the healthcare and retail industry have more visible processes. However, the same is not true about an automobile business. Customers generally do not have a very clear view of the production and distribution processes of automobile brands. They cannot peep into everything that goes on before the finalized cars reach the showrooms. This is the only aspect of automobile operations that they are generally familiar with. It is also true about businesses like Apple inc. However, when it comes to businesses like Amazon or even Facebook, these are highly customer-facing businesses or customers have very high visibility into their operations. These are also some businesses for which transparency and accountability matters a lot. However, even in the physical retail industry, accountability and transparency have become of paramount importance because of the growing focus on the brand image as well as customer trust and customer experience.

In the case of retail brands like Costco, their store operations are the most visible aspect of their operations.  However, store operations of Costco are not limited to just sales or delivery and customer service but instead, the store operations and store environment also play a key role in marketing since the company does not otherwise invest in marketing and promotions. The level of customer service or the type of customer experience inside the Costco stores has a direct and significant impact on the image of the brand as well as its demand and sales. The customer segment that shops at Costco are different from that of Walmart or even Target. Most Costco members are from affluent families living within a close range of Costco warehouses. The company has maintained a different and unique brand image as compared to its competitors. The strong focus on customer experience is also for the reason that it affects the popularity of the brand as well as its growth momentum and its competitive position in the retail industry.

A Few Last Words about Costco’s Business Model:

Costco has established an outstanding and string business model whose core strengths include a competitive pricing strategy and product quality. The company has found impressive growth in recent years driven by strong sales, e-commerce growth as well as higher customer loyalty. Its private label brand Kirkland signature is also an important driver of growth and competitive advantage for the brand. Moreover, Costco’s strength lies in its strong reputation and organizational culture. 

The company does not spend anything on marketing. However, despite that its sales and overall influence in the retail industry continue to grow which is mainly because of a strong business model. Instead of investing in advertising and promotions, the company focused on consistent branding and customer experience to grow customer trust. Moreover, the company follows a culture that does not focus on marketing or growing its influence through the use of promotional tactics. Like several other brands in the market, Costco also believes that if you sincerely focus on product quality and customer service, your influence in the market will continue to grow and your customers will become the advocates for your brand. Over the years, if the position of the company has continued to strengthen in the retail industry, it is mainly because of positive word of mouth as well as a very higher customer retention level. Costco is not everyone’s retailer as Walmart is. It is mainly affluent families that shop at Costco and the company’s presence compared to Walmart is also limited in the US as well as abroad. Despite that, it is a strong retail brand and also remains one of the leading rivals of Walmart.

Abhijeet Pratap

Abhijeet has been blogging on educational topics and business research since 2016. He graduated with a Hons. in English literature from BRABU and an MBA from the Asia-Pacific Institute of Management, New Delhi. He likes to blog and share his knowledge and research in business management, marketing, literature and other areas with his readers.